Mr Turnbull made the revelation today in Canberra alongside Treasurer Scott Morrison saying the ongoing political speculation about conducting an inquiry had been undermining confidence in the banking system.

It was also prompted after the big four banks wrote to the government saying an inquiry was needed to end the speculation and restore trust in the banking system.

“The banks in particular and financial services sector has become a political football - that is not in the national interest,” Mr Turnbull said.

“We have much to be proud of about our banking system and the experience of the global financial crisis should remind us of that - but also much to take care of.

The irrigation industry should look at the banks smart move on Royal Commission. If they want the plan saved and not completely rewritten under a future Governmnt it might be the least worst call.

“We need to maintain the stability of our banking and financial system (and) all Australians, consumers, small businesses, farmers, shareholders, must have confidence and trust in the financial system.

“Now this Royal Commission's establishment will end the uncertainty and speculation.

“It will conduct an inquiry in a thorough and conventional fashion, and in so doing, it will protect the integrity of our banks, thereby ensuring Australians' trust in this critical issue is well founded.”

Mr Turnbull said the banks had “come to a conclusion that they believe that it is best to get on and hold an inquiry”.

“I think people are recognising that the nature of the political environment has created a sense of inevitability about an inquiry,” he said.

“There's been a lot of uncertainty, a lot of speculation.

“While we don't relish this decision, nonetheless, we have to act in the national interest, and that's why we have taken the decision we have.”

Mr Morrison said the government would be allocating $75 million for the purposes of the Royal Commission which was the estimated cost.

Mr Turnbull said the Coalition cabinet met this morning and determined that the only way the government could give all Australians “a greater degree of assurance” was through a Royal Commission into misconduct in the financial services industry.

“Only the government can ensure that a Royal Commission is created, established with respected and capable commissioners,” he said.

“This will not be an open ended commission - it will not put capitalism on trial, as some people in the parliament prefer - and we'll give it a reporting date of 12 months.

“This should not be at commission that runs forever, costing many hundreds of millions of dollars - as would've been the case under some of the proposals.

“The terms of reference will ensure a responsible but comprehensive investigation into how financial institutions have dealt with cases of misconduct in the past and whether those examples expose issues in terms of the cultural and governance issues in terms of the regulation and supervision of the industry.

“We'll be appointing a distinguished former or serving judicial officer to lead the commission.”

Mr Turnbull said the government could be asking the commissioner to deliver a final report by the first of February, 2019.

“I want to make this very clear; a Royal Commission will not be able to recommend compensation for individual cases, but it will be able to make recommendations for the government consider in the interests of making our financial system the most competitive, transparent and accountability in the world,” he said.

But Opposition leader Bill Shorten slammed the government’s backflip saying Mr Turnbull had spent 601 days fighting Labor’s call for a Royal Commission into the Banking and Financial Sector.

“Just 48 hours ago, the Prime Minister said, ‘We have made it clear that we are not going to establish a royal commission’,” Mr Shorten said.

“It says everything about Turnbull’s values and priorities that he only agreed to Labor’s Royal Commission when the banks told him he had to.

“He ignored the pleas of families and small businesses, he rejected the words of whistle-blowers.

“But when the big banks wrote him a letter, he folded the same day.

“If Mr Turnbull had have listened to Labor, we would’ve had a Royal Commission and it would have been done by now, with its recommendations being implemented.”

Mr Morrison said politics would “continue to damage the national economic interest”.

“But y taking control through a royal commission, that is something that was in the ambit of the government, we can provide that certainty that Australian families, Australian businesses…and others are seeking,” he said.

“It's regrettable but necessary.

“It's regrettable that the politics – principally the politicking of the opposition has led to this - but that said, we'll stand up for the national economic interest.”

Australian Greens Treasury Spokesperson and Tasmanian Senator Peter Whish-Wilson said it was a “massive day” for his party and victims of bank misconduct.

“We have been fighting for a Royal Commission into the banks for nearly four years now,” he said.

“We put forward the notion of a Parliamentary Commission of Inquiry that ultimately won the support the Senate.

“If we hadn’t done the hard yards of sitting through Senate Inquiry after Senate Inquiry and working to win the support of Labor, the cross-bench and ultimately the Nationals, the Prime Minister would not have called a Royal Commission today.”